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It's payback time for home generation

VIEWPOINT
Keith Harrison

Home owners are sceptical about the benefits of generating electricity to meet the needs of their own homes, says analyst Keith Harrison. In this week's Green Room, he argues that the UK needs to have an effective subsidies system in order to encourage a significant uptake of domestic renewable technology.

UK consumers are still sceptical about the value of domestic renewable energy

When solar panels for heating water were introduced in the UK nearly 40 years ago, they failed to take off.

Exaggerated claims about how well they worked and how soon buyers could recoup their investment enticed homeowners to buy them, but inefficient technology, installation hassles and poor industry governance effectively stifled any prospect of growth and tarnished the industry's reputation.

At the turn of the 21st Century, home wind generation arrived on the market.

Again, sky-high claims and poor returns made a residential wind turbine more eco-bling than economic.

The disappointment in both solar and wind energy generation over the years has led to the consumer's renewables sector getting some pretty bad press.

However, earlier this year, the UK government said it would start subsidising green energy generated at home.

Is this just another grand idea, or can we expect to see the first rays of a green dawn?

The subsidy for homeowners generating their own electricity is a Feed In Tariff (FIT). Under this scheme, the government pays the homeowner for electricity generated - whether it's fed into the grid or not.

A typical three bedroom home in the UK will consume around 3,000 to 4,000 units of electricity (kwh) per year, costing about £1,000.

A roof mounted Photovoltaic (PV) solar system generating around half of the annual consumption could cost in the region of £10,000.

So the PV system will reduce the annual bill by half, with the FIT covering the remainder of the bill.

Assuming the FIT remains in place and linked to electricity tariffs, the PV installation will have paid for itself in about 10 years.

Now, there are a lot of assumptions in this, but compared to even two years ago, this payback period has reduced significantly.

Cost is king

UK consumers are still sceptical about the value of domestic renewable energy but other regions are much more enthusiastic.

Home energy use is a big contributor to the country’s carbon footprint

When it comes to solar electricity generation, the most popular form of consumer energy generation, Germany leads the world.

At the end of 2009, about 8 gigawatts (GW) of PV panels were installed in Germany, of which some 3GW was residential or consumer generation.

To put this into perspective, a 3GW coal-fired power station would be the second largest power station in the UK.

The German PV market is supported by a thriving network of manufacturers, installation and service companies and, most significantly since 2004, a generous Feed in Tariff, comparable with what is available in the UK.

The growth in consumer renewable generation and supporting businesses was - and still is - primarily down to the FIT.

In the UK, the introduction of FIT for residential or consumer renewable energy is in recognition of how important cost is in consumer decisions on whether to invest in renewable power generation.

There are similar examples in Japan, with high ambitions for residential solar-generated electricity, and the US.

The reputation of the consumer renewables sector in the UK is improving. With the support of the UK Government Department of Energy and Climate Change (DECC), a certification body and scheme for consumer scale renewable generation products and support companies has been established.

Called the Microgeneration Certification Scheme, this scheme is designed to build consumer confidence.

Another key factor in the decision on whether to invest is the efficiency and reliability of the equipment involved.

Today, the fact that other countries have adopted renewable energy enthusiastically means that the effectiveness and cost of technologies has improved.

This applies across all kinds of renewable technologies, from PV solar, small wind turbines, micro combined-heat-and-power units to ground and air source heat pumps.

Payback time

We have looked at some of the factors to consider when exploring the potential of investing in consumer renewable generation.

The payback period for an investment in a PV solar installation can be between 10 and 20 years.

What happens to the price of grid or utility provided power in that period, and beyond, will have a significant impact on the value derived and the payback period.

The future cost of grid, or utility provided power is the big unknown in the value calculation.

We can confidently predict that over the next 20 years this cost to the consumer will rise significantly.

The International Energy Agency (IEA) estimates the EU-wide incremental costs of reducing emissions from fossil fuelled power generation will be $1,300bn (£884bn) between 2010 and 2030. This will increase consumer energy costs.

The likely rises in electricity costs combined with the improvements in consumer renewable generation technologies, the supporting companies and government incentives, make the consumer investment proposition more attractive.

When considering investment in property improvements of a similar price to renewable energy, such as a new kitchen or conservatory, the consumer has an eye on the impact this will have on the value of the property.

An investment in renewable generation will have a positive impact on the value of the property but will also reduce the cost should they decide to stay.

A key point to consider is government subsidy. The growth of the world's renewable energy portfolio over the last decade, whether that be expansive utility-owned wind farms or residential PV solar, has been economically viable as a result of government subsidy or stimulus measures.

Given the pressures of national debt and slow economic growth, combined with the growth in subsidy costs for renewable energy, at some point renewable energy subsidies could come within the sights of cost-cutting politicians.

This, and not whether the technology can deliver, is now the big issue for the renewable energy sector.

Keith Harrison is research director for Gartner, a global information technology research and advisory company

The Green Room is a series of opinion articles on environmental topics running weekly on the BBC News website

Do you agree with Keith Harrison? Would subsidies encourage you to install renewable technology in your home? Is the rising cost of energy going to make renewables more attractive to home owners? Or is generating electricity to help meet your own needs only ever going to be a bit player in the UK's energy mix?

Honestly, I'm incredibly green, but the fact we still have to consider going green a big thing is the biggest nuisance. Remember when 'going online' was a big thing and not something you could do easily? Remember how much resentment the net had 10 years ago? Yeah. Green is like that now. Climate change aside, the second it's cheaper to produce at home on renewables, sensible people will pick it up (of course, there will be a few people who disagree with climate change enough to shoot themselves in the foot.) I myself want my home to be self-sufficient for power. At least then I have a little more comfort in life. And bills are insane.C Alexander, Basingstoke

The government is not forcing everyone to put PV panels on the roof because they are an extremely expensive (at today's prices and in UK) way to achieve almost nothing. The FIT subsidy needed to make them work in UK is 4x the size of the offshore wind subsidy, already rather substantial. Germany has spent something like $70bn on 9GW of panels, which produce average power output around 1.1GW - the carbon savings are equivalent to building one 2GW gas fired power station and retiring a similar size coal station (which would cost around $2b and perhaps $300MM/y extra for fuel). I do wish people would do the numbers before pontificating.Rick, Berkhamsted

As you know, renewable energy is not limited to just wind, solar, or geothermal. It represents a combination of various resources that, when working together, can provide a significant contribution to the energy economy. Now, it would be a good time for critics of renewable energy to put in place long term federal subsidies that will provide the stable and predictable investment climate needed to accelerate UK's transition to a modern and clean renewable energy economy.Engr Salam, LGED,Bangladesh

Having been studying this at University for the last couple of years, I can see what difference a FIT scheme will make to home wind power which is viable (despite frequent contradictions from sceptics). But there's not enough solar irradiance in the UK for solar power to work irrespective of the incentive scheme; my own brief study showed that the most cost-effective system will cost at least six times the utility price of the electricity it generates. The money that would go to photovoltaics - from the Government, households or otherwise - is far better spent on wind, hydro, geothermal or wave power, research or installations.Spike, Cambridge

I already have solar hot water (and other things) and consequently my TOTAL energy bill is less than £200 per year. If you have a south-facing roof it's a no-brainer, you simply cannot lose. We are waiting to see what this new government will do with the Renewable Heat Incentive, which aims to pay you for almost any energy you harvest yourself, including accredited solar hot water systems, which would make the payback for hot water so much quicker. With the FIT, the payback of solar PV becomes very attractive as an investment. The very smart people in my local environment group, several of whom have had PV for a number of years, calculate a return on investment (thanks to FIT) of about 5.8% (tax free), based on recent quotes for an average system and current electricity prices of 10pence/kWh. Unless you are banking on the cost of electricity falling over the 20 year lifetime of the system. And it does add to the value of a house - estate agents (if you trust them!) have stated that a house with a full range of energy measures including good insulation, efficient appliances and suitable microgeneration increases by far more than the cost of putting these measures in. So if you aren't planning to be in the property in 10 or 20 years it should not discourage you from taking up this technology. Some of it is even made in the UK! What few people are talking about, and what is more important to me as an environmentally concerned person, is the energy payback time. That is, how long does it take to recover the total energy that was used manufacturing, transporting, installing, operating and ultimately recycling the whole system. It's really hard to quantify, but sensible and unbiased estimates start at about 3 years. After that, it's win win win! Count me in! (By the way, I don't work for the renewables industry!)Chris, Blewbury, Uk

@Mike Ayres, Investment rates of 5% ?!, I'm in. Don't forget to subtract the price rises that the utility companies will add over the next 10 years. Has anyone done the maths to work out what the payback has been for someone who did install PV 10 years ago, taking into account the change in electricity prices since 2000.Martin, Leamington

Home wind generation was in use at least 60 years ago!!!A English, Gemünden, Germany

Renewable energy is currently economically unsustainable, rendered thus by its inability to generate useful power and low energy density - this is a matter of physics, specifically thermodynamics and is not mutable to ideology. Subsidies cannot get around these inherent deficits, you simply create a goverment approved pyramid selling scheme at the expense of energy consumers.Gary Moran, Birmingham Uk

The problems with these "grow your own" schemes is the scale - or lack of it. The kind of things you put on the shed roof;it's still more efficient to shovel coal in a huge great big power station in Nottingham . It's daft for us to be making our own power; even the wind turbines we have now are toys compared with what we need to build. No single household is going to be able to afford to put up a 10Gw wind mill in their back patio, and it's daft that these schemes are even stumped up to make us try. Build them properly, as the laws of economics dictate; BIG ! Steven Walker, Penzance

My electric usage was also 3292 Kwh last year which cost me £468, 1/2 what the author stated. However, I do believe Solar Panels could be a good idea surely they are preferential to nuclear power! I have recently heard of a company called "A Shade Greener", as featured on "Working Lunch". They will pay for the installation of the Solar Panels, you are then provided with free electricity, with the company recieving the FIT. This seems a win win situation(unfortuantely my T shaped roof has been deemed unsuitable). By extending this scheme eventually the country could have the equivalent of several power stations on people's rooves, reduceing not only our carbon emissions but also our reliance on overseas energy supply which looks to be a significant problem in the future. I noticed that B&Q introduced a wind turbine suitable for roof top instulation. However, I believe it was quite large, bringing about structural and planning concerns. Would it be practical to have smaller wind turbines, maybe the size of a satellite dish? This would presumably overcome these difficulties and would be alot more affordable. I understand that it might only provide a small amount of electicity, but surely any free sustainable production has to be of benefit and I would have thought with a small out lay and future climbing fuel prices it would be cost effective. If anyone knows of any such equipment please let me know. If not has anyone looked into the cost effectiveness of such a product. wendy, Derby

Home energy generation ranks with "the hydrogen economy" for maximum PR noise with minimum results. The few people I know that have installed PV systems have seriously under-whelming results. Even the most pessimistic payoff estimates with maximum subsidies have proven to be wildly optimistic. So, no I won't. David , Oregon, USA

No subsidies will encourage me. I have looked into the figures for the amount of sunlight and wind in the UK, and there simply is not enough of either. If the sunnier countries of the world do not think it is viable, then it certainly isn't in the UK. Some time ago, Channel4 had a programme called "It isn't easy going green". They setup wind and photo vacuum tube solar panels. They got some energy. But they were living on the tip of Cornwall, the sunniest place in the UK, and one of the windiest. Even then it was only viable using a tall tower. Rooftop is worse than worthless, as they can seriously damage the walls. Leave power generation to the large scale projects.George Baxter, Bedford

i think the renewable energy and generation of electricity is a good thing although many people would be interested if the solar companies were not charging exorbedent rates for installation and the equipment, if we are to go green then the benefits and costs for this kind of energy must be attractive for allmark jones, poole

I had PV Solar installed when my house was built which produces between 3-5kwh per day. I like the fact I am producing my own electric and being paid to do so with the FIT scheme and because it was installed during the construction process it was alot cheaper to do, so I am hoping for a sub 10 year pay back. I would like to know why the government is not forcing builders to put PV panels on every new South facing roof built.Steve, Cambridge

I am constantly looking options to install at home, but the cost of installation and ROI just doesn't work out, even now it's lower at 10 yrs this doesn't really make it enticing enough to stump up the cash, over 10 years what is the maintenance cost going to be and do the manufacturers offer a warranty period that adequately covers this ? ?Mark, Colchester, UK

I would love to install PV panels and reduce my electricity bill and dependency on utility-generated power, but (a) I live in a rented house so the resale value is immaterial, and (b) I am old enough that I cannot afford to wait 20 years to recoup the capital outlay, if I pay for it myself. The annoying part is that I shall need more power for heating as I get older reducing my ability to cover capital outlay loan repayments. So this wonderful green policy is irrelevant to people in my position, of which there are more than a few.JCofRamsgate, Ramsgate, UK

While I am in favour of anything that increases the uptake of renewable energy, I am concerned that FITs and the RHI will be treated as a cash cow and do nothing to reduce energy consumption. Got the panels, get paid, carry on as usual!

Surely the problem is in our electricity tariff system where the more we use, the less on average we pay. The 1st 1,000 units at approx 20p, then 10p each for the rest. Change this around so the more we use the more we pay per unit and FITs become irrelevant as there will be a clear incentive to either reduce consumption or generate your own electricity. This change will also benefit the fuel poor. The FIT scheme, in being paid for by the electricity user is doing little more than passing money from the poorer consumer who can't afford their own panels to the wealthy investor. The scheme is not fit for purpose! Simon Mallett, Lenham, Kent

As usual, cost of capital is not included in the pay back equation. £10,000 invested at 5% would earn me £500 a year. If I spend my £10,000 on solar cells I lose £500 a year, making the payback time 20 years, not 10. Mike Ayres, Bodmin/ Cornwall, UK

Energy efficiency technology for the home is at the same stage as loft and wall insulation were a number of years ago. Of course, public opinion will change, but it'll likely take an even greater increase in the cost of heating a home than we've suffered to date - or a reduction in the price of renewables - to encourage home owners to adopt these newer technologies.Grant, Leicester

He talks about the mis-selling that's gone on in the past. Then, right away he claims that the average electricity usage (which I fall, squarely into) costs around £1000 a year. Rubbish! His very first verifiable fact is wrong by a factor of 3. I know what my electricity bill was for 3200 units, last year and it wasn't a grand - it was amount 1/3rd of that. Since he can't even get such a simple and common piece of information correct, every other claim he makes deserves to be dismissed as equally inaccurate. I stopped reading at that point as his piece was so obviously wrong.pete, Marlow

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